In our practices, we often have older clients who have built a substantial balance in their qualified accounts such as traditional IRAs or 401(k) plans. In many cases they don’t need to take income from these accounts when they reach age 73, the new start date for taking required minimum distributions (RMDs). Fortunately, two popular provisions within the Internal Revenue Code will permit them to defer RMDs into the future while making meaningful contributions to charity, as well as reduce the size of the RMDs they would otherwise have to take by using deferred income annuities.

What’s the tax problem with IRA distributions?

Distributions from a traditional IRA or 401(k) are taxed at ordinary rates, currently topping out at 37%. Because they’re taxable, RMDs may also create tax issues around net investment income tax (NIIT) for many taxpayers. For this reason, seniors who don’t need the income often choose to postpone distributions for as

long as possible.

If you don’t need the IRA income, itemize deductions, and want to donate to charity, you are allowed to deduct the distributions you take from your IRA and give them to charitable organizations. However, deductions only offset the federal income tax due on the distributions — and donors who take the standard deduction ( $13,850 for single filers or $27,700 for married filing jointly in 2023) receive no benefit. If the amount of your itemized deductions including mortgage interest is less than the applicable standard deduction, it doesn’t make sense to itemize.

Transferring funds using a qualified charitable deduction (QCD)

A provision in the Internal Revenue Code called a QCD allows people in their 70s and older to transfer funds directly from an IRA to a charity without any seriously negative tax consequences. It’s a relatively easy way to meet RMD obligations if you are at least 70 ½ at the time of transfer. (The SECURE Act of 2019 increased the age threshold for RMDs to age 72; starting in 2023 SECURE 2.0 increases the required beginning date to age 73).

A QCD allows qualified donors to transfer up to $100,000 ($200,000 married couples) per year directly from their IRA to a designated charity, so long as the money never touches your hands and instead is rolled directly from one custodian to another. Not all charities can accept QCDs. Donor-advised funds, private foundations, and supporting organizations are not eligible. Also keep in mind that although you can use Roth IRAs for QCDs, there’s no tax advantage to doing so because Roths are designed to provide tax-free income in the future.

What’s attractive about a QCD for tax-planning purposes is that the transfer isn’t treated as a taxable distribution subject to federal income tax. It also may allow you to effectively lower your income for Social Security purposes. What you can’t do with a QCD is claim a deduction if you itemize. Uncle Sam considers the transfer a “wash” for tax purposes.

New rules under SECURE 2.0 improve the advantages of QCDs in two key ways:

• Annual rollover limits will be indexed to inflation beginning in 2024 — Should you and your spouse be inclined, you may be able to contribute more in the future to your favorite charity.
• One-time gift to split-interest entities. Beginning in 2023, you can include in your QCD a one-time gift of up to $50,000 to a split-interest entity such as a charitable remainder trust (CRT) or charitable gift annuity (CGA). (These amounts will be indexed to inflation beginning in 2024 as well). The CRT either may be a charitable remainder annuity trust (CRAT), or a charitable remainder unitrust (CRUT); the trust term cannot exceed 20 years. In a CGA, you make a sizeable gift to a charity and designate a beneficiary to receive a stream of income during his or her lifetime. The donor also may be the annuity recipient (i.e., the beneficiary), making this option useful for estate planning purposes.

SECURE 2.0 expands RMD exemptions for qualified annuities[1]

There’s another way to avoid having to take full RMDs on a portfolio of your qualified retirement account that doesn’t require getting a charity involved. A qualified longevity annuity contract (QLAC) allows you to use a portion of your retirement account balance, such as a traditional IRA, 401(k), 403(b), or 457(b) plan, to purchase a deferred income annuity and not have that money be subject to RMDs starting at age 73. A QLAC delivers a guaranteed[2] stream of lifetime income on a date you select. For example, you could decide to buy one at age 65 and start taking income at age 75; the longer you extend the deferral period, the more income you’ll receive later. The SECURE 2.0 Act expands the RMD exemption for QLACs by eliminating the requirement that the QLAC premium does not exceed 25% of the individual’s account or IRA balance; increasing the QLAC dollar limit from $125,000 to $200,000 (indexed to CPI beginning in 2024) and permitting the QLAC to include a provision that allows the contract owner to rescind the contract within 90 days (a so-called “free look” provision).

Rules around QCDs and QLACs are complex; these options are not right for everyone. For example, they reduce your adjusted gross income for other tax purposes and could affect deductions and credits you may want to claim, as well as cause the alternative minimum tax and NIIT to kick in. That’s why it’s important to check with a knowledgeable financial advisor or accountant to see whether these tax planning tools make sense for your situation.

The original article was posted by the Pioneer Press.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Wealth Enhancement Group does not offer tax or legal advice.

By Bruce Helmer and Peg Webb, Financial Advisors at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO AM 830 on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities are offered through LPL Financial, member FINRA/SIPC. Advisory services are offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.